Banking disrupted

Five threats to the traditional European banking model – and a roadmap for the future

Faced with the challenges of the financial crisis and re-regulation, retail bankers are distracted from the threat of the “de-banked consumer”. But, as we argue in our new report, banks’ core competitive advantages are being eroded – and they face some tough choices if they are to stay competitive in the digital age.

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European retail banks may take comfort from their success in fending off the first internet-based challengers to their market. But today’s non-bank challengers are notably stronger than those of Web 1.0, and customer expectations have changed.

Today’s customers are used to engaging directly and immediately with retailers, and expect their needs to be anticipated across a range of products and services. They expect similar responsiveness from their bank.

Yet the core competitive advantages that banks have previously used to disarm new entrants have been dramatically weakened:

Oligopolistic access to cheap funding via current accounts is under threat.

New, technologically-enabled forms of competition and the regulatory agenda limit banks’ privileged access to customers and their ability to cross-subsidize loss-leaders through high-margin cross-sales and back-book pricing.

The challenge for European banks is not that any single new entrant or model will emerge to dominate their market. Rather, the risk is that the combination of attackers across the banks’ eco-system will steadily erode their core competitive advantage, resulting in a much smaller banking sector.

Understanding and anticipating these threats is therefore key to retail banking’s long-term profitability. So what are they and what can be done to address them?

Expansion of the securities market

New entrants, new rules

Independent aggregators

Reinventing service elements through technology – the FinTech revolution

Tech titans could enter the fray

A roadmap for the future

What, then, is to be done? To avoid being caught out as market sentiment shifts to favor business models better-suited to this new order, Deloitte believes banks must begin a more radical transformation now. Banks need to:

Focus on developing distinctive capabilities in those markets where they can maintain sustainable competitive advantage across the cycle.

Resist building excess fixed costs at the top of the credit cycle for products like broker mortgages and commercial real estate, where profitability will ebb and flow.

Use analytics to exploit their treasure trove of customer data and match the responsive customer experience provided by other industries.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a detailed description of DTTL and its member firms.